Understanding The Role Of Due Diligence In The Turnkey Business Purchase Process

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Starting off in the field of business, there are usually three common paths. Once – you inherit a business from your parents or family members, Two – you build your enterprise from scratch, Three – you buy an already operating business.

Keeping inheritance aside, building a business from the ground up is fraught with risks and anxieties. Will the business be able to stay afloat? Where do I get funding from? Do I expand now or wait a while? These, and many such questions keep entrepreneurs up at night.

 

On the other hand, there is always the option to buy a thriving turnkey business and skip all the initial toil and turmoil. As exciting and convenient as this may seem, this is not a casual decision. Acquiring a turnkey business involves a lot of due diligence and groundwork before acting upon the idea. Let us delve more into it.

What is a turnkey business?

A turnkey business is a venture where you simply put the key in and turn it to operate. In simpler words, it is a business that is ready, established, and primed for sale. The business should be fully functional and operational for it to be considered a turnkey business. Upon the completion of purchase formalities, the new owner can operate the business as it is with minimal intervention or scaling up.

Why is a turnkey business attractive to buy?

Estimates suggest that over 20% of new businesses fail during the first two years of their existence. Another 30-40% fail in the subsequent 2 years. It is easy to imagine the financial risk, mental anguish, and physical efforts that an entrepreneur faces. This is one of the key reasons why turnkey businesses offer a more lucrative business opportunity as compared to a startup.

The concept, business model, marketing research, technical infrastructure, and customer base are already established and have gone through the test of time, in a turnkey business. Furthermore, the inventory, supply chain, and brand reputation are also in place for you to simply take over. With an upfront investment (the cost of buying the business) you can quickly start getting returns with a low addition influx of capital.

The role of due diligence in the turnkey business purchase process

Evidently, buying a turnkey business presents a good opportunity to get a headstart in your endeavor and bypass the complications associated with setting it up from scratch. However, you cannot simply dive into it based on a whim or gut instinct. Your idea needs to be backed by strong research and due diligence. Here are some of the best practices to aid you in the process.

  • Consider the valuation of the business – Naturally, the seller will be aiming to maximize the amount they receive from the sale while you would be hoping to reduce your capital investment. Instead of indulging in abstract bargaining, it is good to avail the services of a business valuation expert to determine the fair price of the turnkey business.
  • Consider the intangibles – A proper valuation takes into account several objective factors such as the age of the business, the annual cash flow, outstanding debts and liabilities, cost of inventory, net asset value, etc.

However, there are some key intangible aspects to consider as well. Brand reputation and recognition, market reach, customer loyalty, supplier/vendor relations, etc. all add up to the significance and presence of the turnkey business. 

  • Go beyond the financial – Yes, the financial health of a business is vital to consider, but it is not the only important determinant. Many investors have taken over turnkey businesses with poor cash flow (at lower than market prices) and turned them around into profitable enterprises. However, to achieve this, the turnkey business needs to be easily replicable, have robust operations, and have a sound underlying concept.

It is important to measure these attributes, too, as part of the due diligence process. A turnkey business with clearly defined standard operating procedures (SOP), and well-documented process and training manuals are inherently more attractive. It is easy to run such businesses under new ownership with minimal intervention or laggards.  

  • Select the right option – Turnkey businesses are available in various forms and types. If you come across a business for sale in your social/professional network or via an online marketplace, you can directly contact the owner. Another option is to employ the services of a broker or consultant. These experts can help connect you to business owners looking to offload their ventures. Naturally, these services come at a cost.

Buying a franchise of a renowned brand is another way to get into this segment. This mode is quite popular since the brand offers you its standardized training and other resources to give you a boost. Multi-level marketing (MLM) businesses are another attractive avenue since you simply pay for the inventory and have minimal overhead expenses.

This handy guide will be a good starting point for key factors you need to consider before buying a turnkey business. Never underestimate the importance of thorough due diligence and learn more about turnkey business you intend to buy.

 

Source: www.abcbnews.com/